What is Ethereum?
Ethereum is an open-source, decentralized and programmable blockchain that was launched in 2015, based on a white paper published by computer programmer Vitalik Buterin two years earlier. Ethereum builds on the principles and technology of bitcoin but offers expanded functionality, including smart contracts, decentralized apps (dApps) and non-fungible tokens (NFTs).
So far, there are nearly 3,000 Ethereum-based dApps, which are applications that run on decentralized blockchains and don’t rely on a trusted third party to function. These dApps are in sectors including:
- Gaming: Digital games like Axis Infinity (AXS) and Ragnarok (ROK) are built on the Ethereum blockchain.
- Decentralized finance (DeFi): This includes blockchain-based payments (for example, using Polygon’s native coin, MATIC), lending (using AAVE), stablecoins (USDC, tether), asset management tools (such as MetaMask) and more.
- Social media: Ethereum-based social networks and blogging platforms include Peepeth, Mirror.xyz and others.
- Non-fungible tokens (NFTs): These unique digital tokens represent ownership of assets, such as one-of-a-kind digital art collectibles and social media avatars like CryptoPunks and the Bored Ape Yacht Club.
- Metaverse: The metaverse comprises virtual worlds enhanced by augmented reality (AR) and virtual reality (VR). Through online personas, users can socialize, shop, play games and more. The largest metaverse cryptocurrencies, including ApeCoin (APE), Decentraland (MANA) and The Sandbox (SAND), are built on Ethereum.
How does ethereum staking work?
To understand ethereum staking, we first need to understand how blockchains verify transactions.
Ethereum is a decentralized technology, meaning that the code of the Ethereum software is run on a multitude of computers all over the world (nodes) rather than by one corporation. By running a node, each of these computers plays a part in keeping the blockchain functioning securely. There is no centralized authority that makes decisions for the entire network. Rather, the nodes of this peer-to-peer system must reach a consensus on major decisions that affect the blockchain. The two most common “consensus mechanisms,” or validation methods, are proof-of-work (PoW) and proof-of-stake (PoS).
In PoW, nodes called “miners” compete against each other to solve a cryptographic puzzle in order to verify transactions and create new blocks. The node that solves the puzzle first is rewarded with coins. PoW requires expensive, dedicated hardware to run energy-heavy computational algorithms.
In the case of PoS, coin holders stake, or lock up, their coins to contribute to the computational power the network needs to validate transactions and create new blocks. So, with PoS, a blockchain can achieve consensus without the need for pricey mining computers or enormous amounts of energy.
Ethereum uses the proof-of-work mechanism also used by bitcoin. However, to increase the efficiency of the system and reduce the network’s computational and energy requirements, Ethereum is transitioning to PoS. This transition will be complete with “The Merge.” That’s when the Beacon Chain—the blockchain that introduced PoS to Ethereum—merges with the Ethereum Mainnet. This is expected to take place in 2022, but the timeline isn’t certain.
So far, worldwide, investors have staked over 13 million ETH (worth about US$24 billion, as of late May 2022), and more than 391,000 validators have taken part.